June 30, 2016
Brazil's chicken exporting machine runs low on feed
By ERIC J. BROOKS
An eFeedLink Hot Topic
- A 55% devaluation of Brazil's currency resulted in a 50% rise in broiler production costs
- The subsequent over-exporting of corn caused its domestic Brazilian price to jump by up to 60%, the cost of imported energy and supplements also rose, boosting poultry feed costs by 50%
- Even after importing 1.5 million tonnes of corn from Paraguay and Argentina, broiler farms were forced to substitute high quality, human grade wheat to sustain production
- Amid domestic cost inflation and falling consumption, integrators are using high US dollar export prices to maintain profitability
- With Q2 chicken meat output falling 10% and exports increasing by over 15%, the latter cannot be sustained amid such constrained feed supplies
As the world's most feed rich country, it is odd to hear that feed costs are threatening Brazilian broiler farming's prosperity. But thanks to economic mismanagement, that is exactly what is happening at this time.
Essentially, Brazilian corn's fortune is its poultry sector's misfortune. A deepening economic crisis coincided with an impeachment and overthrowing of its elected president. This caused Brazil's real to plunge more 55% against the US dollar, the currency of its main competitor in both world chicken and corn markets.
With Brazilian corn undercutting other suppliers by a wide margin and exports offering much higher profits than domestic sales, shipments jumped to 138% above the previous year's level from January to May of this year.
With export revenues doubling in less than a year, it is far more profitable to ship corn abroad than to sell it to domestic poultry integrators. This mad rush for windfall corn exporting profits caused shipments to exceed last year's poor harvest. Inventories which closed at a USDA estimated 13.98 million tonnes in 2014 and fell to 7.84 million tonnes last year, are dropping to 5.90 million tonnes at the end of the 2015-16 marketing year –but they already fell below this level and are only rebounding now, as the sahfrinha (second season) corn harvest is gathered.
With domestic supplies disappearing, while CBOT corn fluctuated in the US$3.80/bushel to US$4.30/bushel range, the second quarter saw domestic Brazilian corn selling for up to 60% more, sometimes as high as US$6.35/bushel. Hence, when corn suddenly cost $2.50/bushel more in Brazil than in the rest of the world, it was symptomatic of the fact that inventories were too thin to meet poultry feed demand in all parts of Brazil.
As a result, the over-exporting of corn put the second largest corn exporter in the awkward position of needing to import 1.5 million tonnes of corn in the current marketing year. This is five times more corn than it imported in 2015. Most of it was sourced from Paraguay until with its own supplies dwindling, Brazilian integrators started buying corn from Argentina. For example, integrator GT Foods Group was forced to purchase 90,000 tonnes of Argentine corn during the second quarter.
While broiler feed's corn component accounts for approximately 40% of broiler production costs, it was not the only poultry input that the currency's devaluation suddenly made more expensive. Because Brazil is a fossil fuel importer, the real's plunge boosted energy costs relative to that of the US and Thailand, which have stable currencies. At the same time, a rally in soy futures also pushed soymeal costs up 18% too. The net result, according to the USDA, is a 50% increase in overall poultry production costs over just nine months.
While the currency's equally steep devaluation made up for exported chicken's higher feed costs, this is not the case in Brazil's own domestic market. While higher corn costs need to covered by higher revenue, slack consumption means that chicken meat prices have badly lagged the rise in corn costs. From a ratio of 9:1 in February, the domestic chicken:corn price ratio fell to below 6:1 before mid-year.
According to Mario Lanznaster, president of the country's third largest integrator, Aurora Alimentos, "The price of drumsticks in the supermarket is BR5.00/kg (US$1.40/kg); that barely pays for water to produce the meat." The abnormally high retail chicken prices do not merely reflect bloated feed costs and think profit margins; they make for slack consumption in recession-plagued Brazil itself.
Ironically, with Brazil's currency plunging, the only way integrators could keep profit margins stable is by generating windfall Brazilian real revenues by boosting US dollar-denominated export volumes. As a result, the USDA reports that from January to May of this year, "Poultry exports reportedly rose 15.48%... with major shipments to Russia and Saudi Arabia."
–The problem is that exports cannot rise by over 15% and output fall by 10% indefinitely. With domestic profit margins and demand sagging under high costs, the Brazil Animal Protein Association reported that after rising as expected in January and February, broiler meat production fell 10% from March through May inclusive.
Even so, to transcend the strain feed shortages put on their operations and meet export commitments, integrators were forced to significantly boost the wheat content of their poultry rations. Interestingly, unlike normal times when feed quality wheat is used, here too, the real is impacting the market's normal functioning. Just as the real's devaluation made it more profitable to export corn than to sell it domestically, the same effect happened with low-cost feed wheat.
According to the USDA, "Strong export prices have also prompted wheat producers to increase exports of lower quality feed wheat." With at least three large integrators reportedly being forced to buy at least 220,000 tonnes of costly, high quality meant for human consumption for their feed mills, this is yet another boost to the broiler sector's already bloated cost base.
Going forward, there is some relief ahead for poultry integrators. Mid-year sees "safrinha" [second crop] corn being harvested. Even, on account of El Nino-induced dry weather, even the second season corn harvest is coming in 3.8 million tonnes or 7% below initial projections. At 75 million tonnes, total yearly corn production 11.8% or 10 million tonnes below the 85 million tonnes grown in the previous year. Moreover, Brazil's agriculture minister Blairo Maggi notes that with 70% of sahfrinha corn already forward contracted for export, it cannot possibly bring feed costs all the way down to normal levels.
Assuming that the late year growing season is successful, Brazil's corn prices will not return back to international levels until the second quarter of 2017. With 80% of Brazil's broiler meat production consumed domestically, this is problematic for several different reasons.
The aforementioned sharp rise in chicken's domestic price comes at the worst time possible: Brazil has been in a serious recession for three years; it is not expected to resume positive economic growth before 2018.
Consequently, corn-induced supply reduction, cost inflation, thin profit margins or net losses are colliding with three years of falling consumer incomes and rising unemployment. Although the temptation to export one's way out of such woes boosted shipments earlier in the year, with some poultry farms having shut down operations for three months or more, it is not known if production can meet all export commitments.
For now, we can expect feed grain shortages to keep chicken production the same or slightly lower than last year. Ideally, an expected decline in domestic consumption should free up supplies for more export growth than was anticipated, there is great uncertainty at this time.
Much depends on the final size of its sahfrinha corn harvest and Brazil's luck in sourcing alternative feed grains over the next two quarters. The interaction between feed-constrained domestic chicken production, high domestic prices and falling domestic consumption remains uncertain, but will determine Brazilian poultry's 2016's trade performance.
On one hand, Brazil could ideally take full advantage of export demand created by its currency-discounted chicken to meet initial projections. On the other hand, should feed supplies remain constrained, America or US or Thailand will happily fill a hundred thousand tonne poultry market vacuum created by faltering Brazilian corn supplies.
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